Budget 2017: This could also be referred to as the Apple budget and here’s why

Wednesday, October 12, 2016

Eamon Quinn, Business Editor

The 2017 budget — the first since the inconclusive general election — may yet become known as the second Apple budget because of the unexpected role corporate tax bounties has played in funding spending increases and tax cuts over the last two years.

Yesterday’s budget was framed just months after the general election returned a minority-led administration.

A year ago, just a few months away from the election, Finance Minister Michael Noonan infamously rolled two budgets into a single big fiscal package. Just days before presenting his official budget in the Dáil, the finance minister unveiled a spending package that rivalled anything seen during the boom years.

After years of austerity, there was suddenly plenty of cash to fill deep holes in health and transport, and the unexpected cash hoard was to be spent during the last few weeks of 2015. Mr Noonan had maxed up the budget package, effectively doubling his spend-and-tax-cutting measures to €3bn.

There is no debate that the money was badly needed. The harsh years of austerity had left deep scars across the country. Even now, there are many questions left unanswered by the troika and European institutions about the scientific basis of austerity that was imposed across Europe.

Nonetheless, last year’s spending splurge was nothing more than a pre-election stroke which startled independent observers.

Something similar unfolded this year too. It is easy to lose count of the times that Mr Noonan insisted that the 2017 fiscal measures could and would total, at most, €1bn. Little surprise then that the package over the last few weeks had grown to €1.3bn, based on justifications that remain vague. The story of the €1.3bn budget does not end there.

In a pre-budget report released last month, before new spending measures were unveiled, the Irish Fiscal Advisory Council (IFAC) said the economy was already growing strongly.

IFAC said that for Mr Noonan to sanction any more than the €1bn he had indicated for budget spending increases and tax cuts would be unnecessary and unacceptable. IFAC said the budget package was, at that time, worth as much as €2.4bn when various new spending lines announced earlier this year had been taken into account.

The additional spending may be needed but it is the funding of the expenditure that should concern us.

For over a year, the mystery of the State’s corporate tax receipts has taken centre stage.

In 2015, corporate taxes brought in €6.87bn — almost €2.3bn more than was anticipated. That is a staggering bounty.

With various branches of Government unwilling to reveal the full picture, it had been long suspected through last year that multinationals and their international tax arrangements was the source of the Government’s corporate profits haul.

Corporate tax revenues have continued to deliver in a big way this year too.

As recently as last month, while income tax receipts continued to bring in less than anticipated, corporate tax revenues won big for the exchequer. Coincidentally, the same day that it unveiled the September exchequer returns, the Department of Finance cut its growth forecasts for the economy this year to 4.2% and to 3.5% for 2017.

On the face of it, there was little room for any large largesse in spending increases and tax cuts in Mr Noonan’s budget plans. September’s figures showed a puzzling underperformance in income tax, even with more people in work.

Including receipts from the Universal Social Charge, income tax revenues, at €12.95bn, fell short of target by €114m for the first nine months of the year. Vat receipts were slightly above target in September, but have so far fallen short of target by €278m this year.

But again, corporation tax receipts took in €136m more than was anticipated in the single month and were running €644m ahead of target for the first nine months.

Mr Noonan appears to be funding the additional measures in his 2017 budget disproportionately on a single tax source — corporate tax revenues. Huge revisions announced this summer to last year’s Irish GDP levels that led to the international claims of “leprechaun economics” threw new light on the corporate tax mystery. The CSO’s revised figures revealed an enormous increase of €300bn in the capital stock in the national accounts which implied that whole balance sheets of large companies had been transferred to Ireland last year.

The figures did not identify whether it was predominantly one, two, or three large companies, nor did they identify the multinationals behind such extraordinary revisions.

The transfer of the intellectual property did, however, indirectly lead to the exchequer having a much-enlarged pool of potential pre-tax corporate profits from which to collect corporate taxes.

The Irish Examiner reported last month that the 2015 GDP revisions were predominantly driven by the changes by Apple to its international tax arrangements, as it relocated huge amounts of intellectual property rights in Ireland for the first time.

It is well known that a handful of multinationals account for the bulk of corporate tax receipts. The amounts that multinationals, including Apple, pay in corporate taxes to the State remains under wraps.

The public deserves more information, as the contributions made by a handful of large corporations to funding the State is now on a significant scale. Yesterday, Mr Noonan announced the appointment of UCC economist Seamus Coffey to write a report on our tax regime.

The aim of the report appears to be to anticipate any potholes in the Irish corporate tax regime, the ‘Knowledge Development Box’ in particular, which is the lure for many multinationals to deepen or locate resources here. The report will not touch on the 12.5% corporate tax rate, which Mr Noonan said is secure.

The controversies must be avoided if Ireland is to avoid any repeat of the Apple ruling when the EU Competition Commissioner insisted the State recoup €13bn in taxes it said had failed to be collected from the phone giant. The Government and Apple have denied striking any such sweetheart deal and plan to appeal.

Nonetheless, the Government needs to provide more details about its corporate tax revenues.

Additional budget spending in the 2016 and 2017 budgets has been facilitated by the unexpected bounty of corporate tax receipts from multinationals. That is why the latest budget should be known as the Apple budget.